In Depth

The $120 million retention bonus that Simon Property Group Inc.’s board awarded David Simon
two years ago has spawned a bitter legal battle in Delaware that promises to shed fascinating light on the inner workings
of the board.

The huge stock bonus, which David Simon will collect if he stays with the company through July 2019, received harsh criticism
from corporate governance watchdogs, as rich pay packages usually do.

But what was more surprising was that, in a non-binding vote at Simon’s annual meeting last spring, shareholders representing
a whopping 73 percent of shares opposed the bonus.

That’s remarkable because, during Simon’s 18 years of running the business, owning Simon shares has almost been
like holding a winning lottery ticket. Simon Property Group has ballooned into the largest real estate company in the world,
and the stock price has chugged higher and higher.

As you would expect, Simon’s board has argued that it’s worth spending a hefty sum to ensure he stays at the
helm for many more years.

What’s never been clear – but almost surely will come to light as the discovery process gains momentum in the
Delaware lawsuit – is what led the board to suddenly conclude that it needed to take dramatic steps to ensure Simon
wouldn’t quit or jump to another company.

Family business

From the outside, neither scenario looks likely. After all, Simon is the son of company co-founder Melvin Simon and the nephew
of co-founder Herb Simon. So he’s essentially leading the family business. How would taking the reins at, say, Home
Depot be a better gig?

It seemed out of the blue when, in the company’s April 2011 proxy statement, the board’s compensation committee
said it had believed for several years that Simon’s compensation “was not commensurate with his contributions”
and that it was working on a long-term contract that would be more generous.

Without offering specifics, the board in the company’s April 2012 proxy raised the specter of David Simon’s getting
recruited away.

Stepping in to sue in August were the Louisiana Municipal Police Employees Retirement System and the Delaware County Employees’
Retirement Fund. In court filings, they call Simon’s new compensation package “outlandish on its face” because
it doesn’t stipulate that the company achieve any performance benchmarks for Simon to get the $120 million.

Legal issues

The plaintiffs allege board members breached their fiduciary duty to shareholders and violated the law by amending the company’s
1998 incentive-compensation plan without putting it to a shareholder vote.

The plan had to be changed, the plaintiffs argue, because it tied pay to performance goals and clearly barred “a retention
award payable to an employee simply for sitting at his or her desk for a designated period.”

Simon argues the amendment did not constitute a “material change” requiring shareholder approval – a position
buttressed by a 2011 e-mail exchange between the company and a New York Stock Exchange official.

The NYSE mandates that its listed companies put material revisions to incentive plans to shareholder votes. After the company
explained to the exchange why it didn’t think the changes triggered that requirement, John Carey, chief counsel for
NYSE Regulation, followed up with an e-mail saying, “We have discussed your question and we have concluded that we agree
with your analysis.”

The plaintiffs dismiss the exchange, arguing that Carey’s e-mail fell far short of providing an official legal interpretation.
They also argue that taking the position that the changes weren’t material “strains credulity.”

Such legal issues could decide which side prevails in the case. But more interesting will be the e-mails and other documents
Simon will turn over during discovery. Perhaps we’ll finally learn the full story behind the board’s lofty, no-strings-attached
payout.•

__________

This “Behind the News” column originally appeared in the Indianapolis Business Journal.

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